OREANDA-NEWS. Fitch Ratings has affirmed the local and foreign currency Issuer Default Ratings (IDR) for Empresa Generadora de Electricidad Itabo at 'B+'. The rating Outlook is Stable. The rating action includes the affirmation of the 'B+/RR4' rating on the associated bond due in 2020 from Itabo Dominicana SPV.

KEY RATING DRIVERS

Itabo's ratings reflect the electricity sector's high dependency on transfers from the central government to service its financial obligations, a condition that links the credit quality of the distribution companies (EDEs) and generation companies to that of the sovereign. Low collections from end-users, high electricity losses and subsidies have undermined distribution companies' cash generation capacity, exacerbating generation companies' dependence on public funds to cover the gap produced by insufficient payments received from distribution companies. Itabo's ratings also consider its low cost generation portfolio, strong balance sheet and well-structured PPAs, which contribute to strong cash flow generation and bolster liquidity.

Sector's Dependence on Government Transfers

High energy distribution losses (above 30% in last five years), low level of collections and important subsidies for end users have created a strong dependence on government transfers. This dependence has been exacerbated by country's exposure to fluctuations in fossil-fuel prices and a robust energy demand growth (3.8% CAGR in 2009 - 2014). The regular delays in government transfers pressure working capital needs of generators and add volatility to their cash flows. This situation increases the risk of the sector, especially at a time of rising fiscal vulnerabilities affecting the Central Government's finances.

Continued Working Capital Pressure

For the LTM ended in June 2015, Itabo generated negative USD3.8 million of CFFO, compared to USD51.5 million at year-end 2014. Like other generators in the country, the company struggles to collect receivables from distribution companies, and the weaker cash flow metrics reflect significant working capital outflows related to lags in government transfers. At the end of 2Q15, receivable days stood at 191 days (vs. 175 in December 2013). Fitch expects the continuation of arrears accumulation to add further volatility to Itabo's cash flow generation in the future.

Low Cost Asset Portfolio

Itabo's ratings incorporate its strong competitive position as one of the lower cost thermoelectric generators in the country, ensuring the company's consistent dispatch of its generation units. The company operates two low cost coal fired thermal generating units and a third peaking plant that runs on Fuel Oil #2 (San Lorenzo) and sells electricity to three distribution companies in the country through long term U.S. dollar denominated PPAs. The company expects to remain as a base load generator even after a 700 MW coal generation project, sponsored by the government, starts operations by 2017.

Adequate Credit Metrics

The company presents strong credit metrics for the rating category. LTM Leverage, measured as total debt to EBITDA, increased to 1.6x at June 2015 from 1.4x at December 2014. In the same period, EBITDA decreased to USD 74.6 million from USD 81.5 million while the EBITDA margin fell slightly to 35.3% from 36.9%. The decrease reflects lower coal prices, to which prices on contract sales are linked, and lower overall generation in the first half of 2015.

RATING SENSITIVITIES

A negative rating action would follow if the DR's sovereign ratings are downgraded, if there is sustained deterioration in the reliability of government transfers, and if financial performance deteriorates to the point of increasing the ratio of Debt-to-EBITDA to 4.5x for a sustained amount of time.

A positive rating action could follow if the DR's sovereign ratings are upgraded or if the electricity sector achieves financial sustainability through proper policy implementation.

LIQUIDITY AND DEBT STRUCTURE

Debt Structure Adds Flexibility

The company's debt structure is quite manageable with a six year average life which properly contributes to the reduction of liquidity risk. As of June 30, 201, Itabo's cash and marketable security holdings stood at of USD29 million providing sufficient liquidity to meet operational and financial needs.

KEY ASSUMPTIONS

--No material unplanned stoppages in 2H15; possibility of continued climatological impacts on an annual basis
--Demand growth of approx. 3%
--Fuel prices to remain low in the near- to medium-term
--Factoring agreements result in working capital inflows in the near term

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings:

Empresa Generadora de Electricidad Itabo
--Foreign and local currency IDRs at 'B+'.

The Rating Outlook is Stable.

Itabo Dominicana SPV
--2020 Senior Unsecured Notes rating at 'B+/RR4'.